Quick Facts

Azerbaijan’s economic freedom score is 61.0, making its economy the 85th freest in the 2015 Index. Its overall score is 0.3 point lower than last year, reflecting declines in the management of public finance, investment freedom, and trade freedom that outweigh improvements in freedom from corruption and regulatory efficiency. Azerbaijan is ranked 17th out of 41 countries in the Asia–Pacific region, and its overall score is above the regional and global averages.

Azerbaijan’s gains in economic freedom over the past five years have moved it into the “moderately free” category. Wide-ranging reforms have resulted in limited progress in regulatory efficiency and economic diversification, improving the overall macroeconomic and entrepreneurial environments. Tax reforms and continued openness to global trade and investment have aided Azerbaijan’s gradual transition to a more market-based system.

Nonetheless, substantial challenges remain, particularly in implementing deeper systemic and social reforms to strengthen the foundations of economic freedom. Property rights and freedom from corruption remain fragile, and burdensome regulatory requirements continue to undermine the emergence of a more dynamic private sector and long-term economic development.

Background

President Ilham Aliyev was elected to a third term in 2013 amid evidence of massive electoral fraud. His father, Heydar, ruled Azerbaijan first as a Soviet republic and later as an independent country until his death in 2003, when his son succeeded him. An upsurge in violence in 2014 between Armenian and Azerbaijani forces nullified progress in peace talks regarding their dispute over the Nagorno–Karabakh region, which has cost tens of thousands of lives and the loss of about a fifth of Azerbaijan’s territory. Falling oil production is expected to be partially offset by natural gas exports. In 2015, construction will begin on the Trans-Anatolian Natural Gas Pipeline to export Azeri gas through Turkey and ease Europe’s energy dependence on Russia. Negotiations for accession to the World Trade Organization began in 2002.

Corruption is widespread, and wealth from oil and gas exports creates growing opportunities for graft. The judiciary is corrupt, inefficient, and largely subservient to the president and ruling party. Government officials are rarely held accountable for corruption. In general, respect for property rights has plummeted. The state appears able to seize any property it wishes, and ordinary citizens have little recourse.

Azerbaijan’s top individual income tax rate is 25 percent, and its top corporate tax rate is 20 percent. Other taxes include a value-added tax and a property tax. The overall tax burden is equal to about 13 percent of gross domestic product. Government expenditures, supported in part by oil revenue, equal 36.7 percent of domestic income. Government debt amounts to less than 15 percent of the domestic economy.

The business start-up process has been streamlined, but licensing requirements remain time-consuming and bureaucratic. Although relatively flexible employment regulations have been put in place, enforcement has been uneven in practice. Price controls are in effect for most energy products, and monopolies, limits on imports, and agricultural subsidies also cause distortions in domestic prices.

Azerbaijan’s average tariff rate is 4.5 percent. Although the country is working to improve its customs procedures, its relatively inefficient regulatory and legal systems can deter trade and investment. Banks hold about 95 percent of total financial-sector assets. Azerbaijan’s financial penetration rate remains one of the lowest in the region. Capital markets are dominated by government securities.